NJ Tax Court Denies Municipality’s Motion To Compel Production of Tax Returns Relative To Income-Producing Hotel Property in Pending Property Tax Appeal

November 2011Newsletters In the Zone

In a recent unpublished decision (HPT CW Properties Trust v. Township of Mount Laurel, Docket No. 003351-2010 (Decided October 27, 2011)), the Tax Court of New Jersey refused the efforts of Mount Laurel Township to compel the production of income tax returns of a plaintiff-taxpayer in a property tax appeal dispute. The court’s decision reiterates the strong presumption under the law against the disclosure of income tax returns except in compelling and limited circumstances.

The matter came before the Tax Court on the township’s motion to compel the production of documents. It sought federal income tax returns against the owner of income-producing real property that was the subject of the pending tax appeal. The procedural history of the appeal appears straight-forward. The plaintiff filed a property tax appeal challenging the 2010 tax assessment on the limited service hotel operated on the subject property. From all accounts, the case proceeded on the usual course, and the parties exchanged discovery pursuant to court rules. During discovery, the plaintiff produced income and expense statements related to the hotel operation for the three years preceding the tax year in question. Upon review of that information, the township’s motion papers indicated that due to inconsistency among the income and expense statements provided, the township requested the plaintiff produce income tax returns in order to resolve “considerable variation” in the reported revenues and expenses. The plaintiff objected to the production of the tax returns on the basis that it had produced detailed income and expense statements and the production of plaintiff’s tax returns was not warranted absent a demonstration by the defendant of a compelling need for those documents.

The township moved for an order to compel the production of the tax returns, which the plaintiff opposed. The Tax Court held that the production of federal income tax returns was not warranted in this situation because the income and expense reports the plaintiff produced were comprehensive and the defendant made no argument that the documents produced were incomplete or insufficient. Further, the court rejected the township’s justification for its request that the “considerable variation” in the income and expenses over the years compelled the production of the tax returns to the township’s appraisal expert that were necessary for the appraiser’s “due diligence.” In fact, the plaintiff’s moving papers indicated the variation reflected a steady decline of revenue attributable to a depressed economy and its impact on limited service hotels.

Moreover, the Tax Court reasoned the township was well within its powers of discovery to seek backup materials for the figures in the documents and to take the deposition of a person with knowledge of the income and expenses associated with the property to test the veracity of the information produced by the plaintiff. Because of these alternative avenues and the good cause requirement for production of tax returns, the court determined the “plaintiff’s interest in protecting the confidentiality of its tax returns predominates over defendant’s asserted interest in compelling the production of those documents.”

The chief tenet of this decision is that owners of income-producing properties that might be subject to a tax appeal must recognize the importance of providing a true, accurate and detailed account of the income and expenses of the property. Sometimes, property owners give short-shrift to completing the income and expense statement requests promulgated by the municipal tax assessors (also known as a Chapter 91 Request) without giving due consideration of the importance for timely and accurate reporting of income and expenses. In this case, the taxpayer’s willingness to compile and provide the requisite income and expense information staved off a motion to compel the production of its income tax returns, but that probably would not have been the outcome if the taxpayer had not been as forthright in its reporting.

For more information, please contact Alexander M. Wixted at 609.895.6730 or [email protected].

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